Pros and Cons of Buy Here, Pay Here Dealerships

If you have poor credit, buying a car can be a challenge. Traditional auto lenders and dealerships may be unable to help you secure financing, leaving you without a vehicle.

Buy here, pay here dealerships can be appealing since they offer quick financing on the spot, even if you have less-than-stellar credit. But that convenience comes with a catch in the form of high rates, prices, and tough repayment schedules.

Before signing your name to a loan agreement, carefully read and understand the loan terms and explore other financing alternatives.

What is a buy here, pay here dealership?

A buy here, pay here dealership is a used car dealership that functions as both the vehicle seller as well as the lender. Rather than going through a bank or credit union for financing as you would through a traditional car dealer, a buy here, pay here dealership finds the loan itself. Afterward, you make payments directly to the dealer.

Buy here, pay here dealers are specifically for car buyers who struggle to qualify for traditional financing. Those with poor credit, no credit, or past credit issues are the core customer base. In fact, buy here, pay here dealerships issue 50% of their loans to deep subprime borrowers, or those with credit score under 580.

For borrowers who are unable to qualify for auto loans and need a car to get to school or work, buy here, pay here dealerships provide real assistance. But that helps comes at a cost.

For car loans, lenders usually break borrowers into the following categories based on their credit scores:

Buy here, pay here dealership vs. traditional auto lenders

To put those numbers in perspective, say you buy a used car from a dealership with a traditional auto loan.

If you borrow $17,000 at 14.60% APR with a 60-month loan term, you'd repay a total of $24,052 over the life of the loan.

Now say you buy a used car from a buy here, pay here dealership. For the sake of comparison, you borrow $17,000 with a 60-month term. But, because of your credit, you qualify for a rate of 25.39%. As a result, you'd repay a total of $30,172.

The higher rate would cost you an additional $6,000 over the life of the loan.

Read more >> What is buy here, pay here, and how does it work?

Pros and cons of buy here, pay here dealerships

Weight the benefits and drawbacks before purchasing a vehicle from a buy here, pay here dealership.

Pros

• No credit check. These dealers finance in-house without sending your application to a bank, so approval doesn’t depend on a hard credit check.
• Poor credit and no credit accepted. Buy here, pay here dealerships specialize in loans for borrowers with low credit scores or no credit history, so they can help you get a car as you work to build your credit.
• Quick approvals. When you need a car right away, in-house financing can make it easier to buy a car and drive off the lot the same afternoon.

Cons

• Higher interest rates. Interest rates on buy here, pay here loans tend to be higher than the rates on traditional auto loans. For subprime borrowers, the average rate is over 25%, adding to your overall loan cost.
• Aggressive repayment schedules. Many of these dealers require weekly or biweekly payments instead of monthly installments, often with shorter terms and higher payments. That leaves little room for a bad week and a higher risk of repossession.
• Higher sticker prices. Vehicle prices at buy here, pay here dealers tend to be higher than cars of the same make, model, year, and similar mileage at traditional dealers. Combined with the higher loan rates, you could end up paying significantly more over the life of the loan.

Run the numbers >> Kikoff's auto loan calculator shows how your rate and term shape both your monthly payment and what you'll pay in total.

Alternatives to buy here, pay here dealerships

Before turning to buy here, pay here car lots, consider alternatives:

1. Save a larger down payment. Putting down a larger payment up front reduces how much you need to borrow and makes you more attractive to lenders. Saving anywhere from 10% to 25% of the vehicle's purchase price could help you purchase a vehicle with a traditional auto loan.
2. Opt for a less expensive car. If your credit is less-than-perfect, consider choosing an older, cheaper car with a lower sticker price. You may be able to qualify for a smaller loan through a traditional, reputable dealership without having to take on the high rates of a buy here, pay here loan.
3. Consider credit union options. Some credit unions offer second-chance auto loans designed for borrowers with poor credit or past financial issues. These loans tend to have lower rates and better repayment terms than buy here, pay here dealerships.

Taking a few months to pay down debt and build your credit could make it easier to qualify for a traditional car loan later on.

If you're starting from scratch, Kikoff's Credit Account reports your on-time payments to all three credit bureaus — no hard credit check required.